I'm couching the question in terms of the academic milieu, but I suspect people in other types of organizations face a similar kind of choice.
Behind door #1:
The micro-manager from Hell is in a position such that you have to interact directly with him/her. Your good ideas, your empirical grip on what will work and what will not, your sensible estimate of the time and resources required to get it done, even your understanding of the goals to which your labors are supposed to be directed -- all get discounted (because they don't necessarily fit with the micro-manager from Hell's vision and/or game plan) as the project gets micro-managed to Hell.
Behind door #2:
The micro-manager from Hell moves to a higher position on the org chart. As a consequence, the folks with whom you interact directly are no longer micro-managing you and your labors to Hell. However, some of these folks are themselves getting micro-managed to Hell by the micro-manager from Hell, and there's a good chance that the university itself may start drifting into unproductive directions as a result of particular wrongheaded priorities and hellish micro-management coming down from the micro-manager from Hell.
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This is easy. The "dime must be dropped" - in other words, someone (you) must contact the relavant higher exectutive and pass on their concerns - with specific details.
In my Supervisory Skills Training course, they pointed out that in dealing with a problem supervisor, it is very important to take personality out of the discussion, and focus on the specifics.
It is also advisable to have a gameplan drawn up - or at least outlined - that will help alleviate the problem.
My $.02 and worth every penny - maybe.
Also you need to go as a group. A single person complaining will be discounted as having the 'wrong' chemistry/attitude/whatever to work with the MMfH.
Why should anyone listen to you?
No, that's not verbal aggression. It is a question you have to be prepared to answer, and in terms of their values.
Ultimately negotiating power comes down to, "what will it take for me to walk away from the table?" If the answer is that you're not willing to vote with your feet then there isn't much to discuss.
Thankfully, from my point of view at the moment this actually is a hypothetical question. I'm on sabbatical, so the only one micromanaging me at work is me (and I'm not doing an especially good job of it).
However, such managers (or people in positions of authority over important projects) do walk among us. And they exist at all levels of the academic hierarchy. Among other things, this may mean that their strategy of micromanagement is actually supported from on high. So, while mounting an appeal against it has a certain appeal, it's far from a sure thing that it would receive good results. (Especially for projects which are ad hoc, the presumption seems to be in favor of letting the local manager-type call the shots.)
The real question I was trying to get out, I suppose, is this:
Is it better to be relieved of the full brunt of being micro-managed (if the person micro-managing you gets promoted and thus is occupied with "bigger projects") even though the promotion of the MMfH might end up leaving the larger organization in a worse state? Maybe, locally, those impacts aren't so immediately and constantly bothersome (because they don't directly affect the projects you're working on), but (1) they might be immediately and constantly bothersome for lots of other people in the organization, and (2) the effects might trickle down (or double back) to muck up projects that matter a lot to you.
But still, not being micro-managed to Hell is an attractive option ...
The question is, if you'll pardon me, academic. For anyone in a position to actually influence the outcome, the appropriate answer is "let hir micromanage an individual-contributor position: hir own." The very premise of the question you posed is that there is no way to prevent the incompetent from doing harm, and it's only a question of how far above the Peter Point s/he rises.
Having been presented (far too often) with micromanagement during my career, I get back to my previous point: either be prepared to solve the problem with your feet or be prepared to accept the Lord assigned to you from On High. Influences beyond your control can turn all others into one of those two.
I have actually lived through this. I chose Option #3 as limned by j-dog. Though it was not my intended outcome, I wound up getting the MMfH's job.
Chris and j-dog have nailed it. This is why many orgs in the corporate world have a mentoring program, connecting employees with a higher up that can make things happen on their mentee's behalf.
rj
Of course, when the mentor is a micromanager from Hell or a confirmed critic... Sometimes you can bear with it for a while until they realize you can be trusted. Otherwise you probably have to vote with your feet. A third option is to give the MM's name to recruiters.
Having worked in medical research and the pharmaceutical industry for Micromanagers from Hell, I can feel the pain.
As a contractor in my current life, I get micromanaged to death by my clients. However, I'm now getting paid to suck up the pain, so I take their comments in stride with a lot of "Uh huh, I understand exactly where you are coming from..." and "I'd be happy to do that, but as it is outside the specifications of our contract, it'll cost you XXX hours and XXX dollars to make that change. Would you like me to implement those changes for you?", which is obviously not something folks in the academic world can do.
I really like Monado's suggestion about the recruiter option! Maybe Janet should give us some perspective on ethical vs. not-quite-ethical vs. totally not ethical ways to provide references?
A possible answer can be found in Niven and Pournelle's Escape From Hell. It involves lawyers out to put Hell under control, Robert Oppenheimer, and a suicide bomber. Yes, micro-managers in Hell. :)